Minority Investors Cry Foul in Japan

By Kana Inagaki

KDDI Corp. and Sumitomo Corp.’s plan to take over Japan’s biggest cable-television operator has exposed a lack of protection for minority shareholders, who are crying foul over the process and pricing for the $2.4 billion bid.

Unlike in the U.S. or Hong Kong, where a sufficiently large share of minority holders can block a tender offer, small investors in Japanese companies don’t always have that power. Investors said the current deal for Jupiter Telecommunications Co., if pushed through, could hurt investors’ confidence and dent foreign investment in Japan.

The saga goes back to Oct. 24, when KDDI, Japan’s second-largest mobile carrier, and trading house Sumitomo, which together own 70.7% of Jupiter, offered to buy the remaining shares for ¥110,000 (about $1,211) apiece. Jupiter said the price, a 39% premium to the average closing price over the preceding three months, was “appropriate” and provided “a reasonable opportunity” for shareholders to sell their stakes.

Jupiter, also known as J:COM, said it had set up a third-party panel in mid-October to evaluate the offer, adding that Sumitomo and KDDI rejected its earlier request for a higher price. The panel, which included an attorney and a finance professor, concluded that J:COM’s board should recommend that shareholders accept the offer.

However, J:COM’s quick endorsement of the offer raised alarm among many minority shareholders, generally institutional investors in the U.S., Europe and Asia. They questioned the valuation, the board’s independence given that nine current or former employees of the bidders are among the 11 members, and the third-party panel’s recommendation.

Some minority shareholders, dissatisfied that the third-party panel had conducted negotiations and discussions for only a week before it advised J:COM’s board to recommend the offer, sought further explanation on how the price was determined. J:COM responded that it would act appropriately but provided no further explanation, according to lawyers representing the shareholders.

“It makes you wonder who protects the minority shareholders and in what way. We are concerned that global investor appetite [in Japanese shares] will decline if corporate governance is not appropriately exercised,” said Mangyo Kinoshita, a partner at O’Melveny & Myers LLP, which is representing those shareholders.

The terms underscore the contrast with other developed markets, where tender offers can often be blocked if a certain percentage of minority shareholders oppose the bid. In the J:COM deal, a majority of minority shareholder approval isn’t required.

Although shareholders can petition Japanese courts to determine the “fair price” for being squeezed out, the process is costly and time-consuming.

J:COM said it would express a fresh opinion once the tender offer date is set, but declined to elaborate. Spokespeople at KDDI and Sumitomo also declined to comment. J:COM was advised by Mitsubishi UFJ Morgan Stanley Securities, KDDI was advised by J.P. Morgan Chase & Co., and Sumitomo was advised by Goldman Sachs Group Inc.

Some minority shareholders say the valuation is too low. Sumitomo offered ¥139,500 per share for a partial buyout in 2010, and J:COM didn’t recommend the offer to shareholders at the time. Since then, J:COM’s revenue and cash flow have risen and its debt burden has fallen, which makes the offer price of ¥110,000 unsatisfactory, they say.

Moreover, the premium attached to J:COM’s shares is effectively gone because Japanese shares have risen sharply since October, and therefore the price should be raised, they said. J:COM ended at ¥108,700 on Tuesday, and the Nikkei Stock Average’s 21% gain since October suggests the share price could have exceeded KDDI and Sumitomo’s offer had it not been capped by the bid.

The share price also should reflect the value of potential synergies, said Nathan Ramler, an analyst at Macquarie in Tokyo. The firm put that at ¥16,000 yen per share in October. He declined to comment specifically on where the offer price should stand.

Other analysts not associated with the deal said the premium is sufficient. J:COM’s share price has fallen roughly 20% in the past two years, and there is less growth potential for Japan’s cable TV industry than in 2010 because of increased competition. Some analysts said the 2010 offer was overpriced because of a bidding war between KDDI and Sumitomo, who are now partners.

In early January, law firms O’Melveny & Myers and Nijubashi Partners jointly sent a letter to J:COM’s board on behalf of foreign and domestic investors that own about 5.9% in the company, asking for a reconsideration of the offer price.

The group has gained support. As of Friday, investors holding about 7.3% of J:COM’s shares outstanding expressed concerns on pricing, lawyers said. The law firms declined to name the investors.

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